Are You Backing The Right Horse With Silver Run Acquisition Corporation II (SRUN)?

Silver Run Acquisition Corporation II ( NASDAQ:SRUN ), a USD$299.12M small-cap, is a capital market firm operating in an industry, which has been simplifying their business and operating models over the last few years, both for economic reasons and to reduce organizational complexity. Financial services analysts are forecasting for the entire industry, a somewhat weaker growth of 8.70% in the upcoming year, and a strong near-term growth of 27.01% over the next couple of years. This rate is larger than the growth rate of the US stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether SRUN is lagging or leading in the industry. See our latest analysis for SRUN

What's the catalyst for SRUN's sector growth?

The threat of disintermediation in the capital markets industry is both real and imminent, taking profits away from traditional incumbent financial institutions. In the previous year, the industry saw growth in the teens, beating the US market growth of 4.49%. Given the lack of analyst consensus in SRUN's outlook, we could potentially assume the stock's growth rate broadly follows its capital markets industry peers. This means it is an attractive growth stock relative to the wider US stock market.

Is SRUN and the sector relatively cheap?

The capital markets sector's PE is currently hovering around 19x, in-line with the US stock market PE of 22x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 11.19% on equities compared to the market's 9.99%. Since SRUN's earnings doesn't seem to reflect its true value, its PE ratio isn't very useful. A loose alternative to gauge SRUN's value is to assume the stock should be relatively in-line with its industry.

What this means for you:

Are you a shareholder?Capital markets stocks are currently expected to grow slower than the average stock on the index. This means if you're overweight in this sector, your portfolio will be tilted towards lower-growth. If growth was one of your main investment catalyst in the sector, now would be the time to revisit your holdings in SRUN. Keep in mind the sector is trading relatively in-line with the rest of the market, which may mean you'll be selling out at a reasonable price.

Are you a potential investor?The financial sector's below-market growth and average valuation hardly makes it an exciting investment case. If you're looking for a high-growth stock with potential mispricing, it seems like capital markets companies like SRUN isn't the right place to look. However, if you're interested in the stock for other reasons, I suggest you research more into the company's cash flow as well as its financial health in order to gain a holistic view of the stock.